South Africa faces some of the highest rates of economic crime in the world. Recognizing that suppliers and vendors pose greater risks of economic crime and fraud, it is essential to understand the utility of comprehensive third-party due diligence protocols that can reduce risk and secure business transactions.
Stock Theft – The Dangers of Lacklustre Due Diligence
Recent years have seen a rapid increase in sophisticated credit scams that target South African suppliers. Sometimes totalling tens of millions of Rands, these types of scams target the suppliers of goods that can easily be resold, such as building materials or, in the time of Covid-19, personal protective equipment (PPE). In South Africa, a Carte Blanche investigation in 2021 investigated how suppliers were defrauded of millions of Rands of essential PPE stock at the height of the pandemic.
The scam was highly sophisticated. Criminals hijacked the identity of legitimate companies and created fake websites, letterheads and custom emails, even going so far as to hire out upmarket offices. Having stolen the identity of these legitimate companies and their employees, the fraudsters sent out credit applications to dozens of suppliers, requesting to buy stock on credit.
Although these efforts are noteworthy, the fact that these scammers must disintegrate their identities the moment the scams are successful means that their genuine appearance will only run skin deep. Physical addresses, phone numbers, bank accounts and other such traceable information will all exist on an extremely short-term basis that seldom exceeds three months – details that make them easy to detect with comprehensive due diligence protocols.
However, even though the suppliers conducted credit checks, this extensive fraudulent activity was not detected. The companies hired to ensure secure business transactions carried out lacklustre due diligence measures that failed to detect fraudulent activity. Consequentially, the suppliers approved the credit applications, and the stock was delivered. The scammers then disappeared without a trace the moment the stock was delivered, leaving the suppliers completely out of pocket and with no recourse. These devastating scams were made possible by credit check companies that failed to carry out comprehensive due diligence on behalf of the suppliers who hired them.
Do Business Partners Pose the Greatest Risk of Fraud?
The threats posed by business partners are especially pertinent for Small-and-Medium Sized Enterprises (SMEs), which are increasingly turning to outsourcing as a means to cut costs. Although it is oftentimes effective, a greater reliance on third parties exposes the business to a new threat landscape with a broad range of potential bad actors. This increased risk is clearly reflected in recent economic crime statistics.
Respondents to a PwC survey were asked to identify the external perpetrator responsible for the most disruptive economic crime incident they suffered in the last two years. 18% of respondents cited vendor/supplier, 15% cited joint venture/alliance partner, and 13% cited consultant/advisor. Combined, these three groups – all categorized as business partners of some form – were responsible for 46% of the most disruptive economic crimes against the responding businesses.
Shockingly, however, 24% of respondents in PwC’s survey had no third-party due diligence or risk monitoring program whatsoever, despite 20% of respondents citing vendors/suppliers as the perpetrator of their most disruptive incident of financial crime. This discrepancy must be addressed if businesses wish to operate in an environment free from crippling distrust.1
4 Ways that Due Diligence can Reduce Operational Risk
Due Diligence and Risk Management Protocols
These are essential for ensuring the security of business transactions, especially when conducting business with unknown third parties. Although due diligence is a broad term that encompasses many different protocols, the following five are central to a comprehensive risk assessment and risk management strategy.
Company Details and Registration Checks
If they have done so at all, fraudulent companies will have only recently registered with the Companies and Intellectual Properties Commission (CIPC). By pulling data from the CIPC database, a thorough due diligence check will reveal the date of company registration, enterprise name and duration of registration, and tax and VAT numbers. Past and present director details that are linked to the company registration number will also be displayed.
Company Credit Checks
A company credit check is an indispensable risk assessment tool when evaluating another company’s request for credit. However, comprehensive credit checks should not be done in isolation and should return more than simply a credit score – world-class solutions will include a full company credit report, credit summaries of all the associated directors, and a calculated company risk score.
Company Bank Account Verification
Verifying a company’s bank account is another excellent way to verify the integrity of the business in question. By conducting an AVS check and verifying the account that the company registration number is linked to, a responsible business can check how long the bank account has been active – a recently created bank account is a warning sign of fraud.
Company Sanctions Check
It is essential to ensure that the company in question does not feature on any sanction lists. In addition, identifying a company’s connection or association with any politically exposed persons is key to managing risk and ensuring that all AML/CFT compliance obligations are met before any business is conducted.
Due Diligence, Risk Management and Identity Verification Services
All the due diligence and risk management services that have been discussed are services offered by ThisIsMe. As South Africa’s leading provider of world-class due diligence and remote-onboarding solutions, ThisIsMe is proud to be at the forefront of a trust-based and privacy-compliant digital world. To experience our full suite of advanced due diligence services, book a demonstration by contacting our team here.
Citations
- PwC. Global Economic Crime and Fraud Survey. 2020.
